Lower Rate, Lower Payment Not Always a Good Deal Make
Todd Gehrke
Helping people find ways to make their money work for them so they don't have to work as hard for their money as an Independent Mortgage Broker.
Many people think a lower rate or lower payment = a good deal. I have been working on a comparative analysis tool that exposes that mistake. I am a sucker for numbers and trying to figure what a good deal is. Check this out!
This deal that came to me with a 4.125% rate, just over 23 years left. The guy had quoted her 3.125% (1% LOWER!) and showed her she would save $425 per month with $3,500 in total closing costs including appraisal, title, etc. Pretty standard. He told her the loan with "pay for itself" after 9 months. ($3,500 in costs divided by the $425.00 savings).
All that is pretty much true--UNTIL he said this: "At $425 per month for 30 years this new loan will save you $150,000 over the life of the loan." No--it will not. He took the monthly savings from the very first payment, $425 and multiplied it by 360 payments. That's not how it works. Amortized interest is not arithmetic. It's a little more advanced than that. The reality is this new loan would COST $1,694.92 more than her current 4.125% loan after 30 years. If that was her motive.
BOTTOM LINE: There are many factors in determining what a “good deal” is when it comes to money, whether that is borrowing it or investing it. Maybe Junk mailers, spammers and telemarketers aren’t the right place for advice on such an important element in your life.
Todd Gehrke has been helping people with financial questions structured around mortgages in Colorado since 2001. For more information he can be reached at [email protected]. For an overview of his financial philosophy visit www.affluentology.com